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Martin Shkreli hired same audit firm for KaloBios used at Retrophin

Published: Dec 29, 2015 8:19 a.m. ET
http://www.marketwatch.com/story/martin-shkreli-hired-same-audit-firm-for-kalobios-that-he-used-at-retrophin-2015-12-28

Marcum agreed to audit KaloBios even after investigations, lawsuits that cast Shkreli in a problematic light

Martin Shkreli, who was arrested on fraud charges on Dec. 17, hired the same auditor for his most recent company as the one he used at an earlier company that is now suing him over an alleged scheme to defraud it.

Marcum LLP, a microcap-focused public accounting firm, signed up to audit KaloBios Pharmaceuticals KBIO, -5.09% just weeks ago at Shkreli’s request. Marcum had audited Retrophin Inc. RTRX, +1.59% —a company that Shkreli founded but which is suing him—during the 2013 period when transactions that are now the subject of charges by the Securities and Exchange Commission and the Justice Department occurred.

Last Monday KaloBios fired Shkreli, who had become its CEO after taking a controlling stake in the company in November. After his arrest he also stepped down from Turing Pharmaceuticals, a private company that he founded. Shkreli’s spokesman issued a statement at the time of the arrest saying Shkreli denies the charges and “expects to be fully vindicated.” That spokesman did not respond to a request for comment on Shkreli’s choice of Marcum to audit KaloBios.

Marcum did not respond to repeated requests for comment.

Marcum signed Retrophin’s clean audit opinions for 2012 and 2013. On March 31, 2014, while Shkreli was Retrophin’s chairman and CEO, Retrophin’s audit committee notified Marcum that it was hiring another firm, BDO, to perform its 2014 audit.

Marcum’s 2012 and 2013 audit reports for Retrophin were not qualified or modified in any way, except that each contained an explanatory statement with respect to uncertainty regarding Retrophin’s ability to continue as a going concern, given repeated losses—not unusual when a company continuously loses money.

On Sept. 30, 2014, Retrophin announced it had fired Shkreli but did not say why. The company also disclosed it had sold him the rights to some of its drugs so he could start another company, the private Turing Pharmaceuticals.

Almost six months later, in its annual report dated March 11, Retrophin disclosed that because of errors related to transactions Shkreli used to settle and release claims against a hedge fund, MSMB Entities, that he owned, as well as claims against him personally, its 10-Q and 201310-K, signed off on by Marcum, should “no longer be relied upon” by investors and would be restated.

The transactions that prompted the accounting error corrections and restatement, and Retrophin’s lawsuit, are now the subject of the SEC and Justice Department fraud charges against Shkreli.

Retrophin also disclosed that it had received a subpoena in January as part of a criminal investigation by the U.S. attorney for the Eastern District of New York. The subpoena requested information regarding, among other things, Retrophin’s relationship with Shkreli and individuals or entities that had been investors in investment funds previously managed by Shkreli.

It wasn’t until its lawsuit, filed on Aug. 15, that Retrophin accused Shkreli of the behavior that apparently had led it to fire him nearly a year earlier. In an emailed statement to the New York Times, a Retrophin spokesman said that the board had replaced Shkreli “because of serious concerns about his conduct” and that a subsequent investigation “identified substantial self-dealing and breaches of fiduciary duty.”

Retrophin’s lawsuit contends that auditors from Marcum learned about the questionable transactions in August 2013, well before Marcum signed on in early December as auditor of KaloBios. Retrophin also alleges that at that time Marcum had “determined that these agreements were for the primary benefit” of Shkreli’s hedge fund, not Retrophin.

Marcum is not currently the subject of any lawsuit relating to its auditing of Retrophin.

Retrophin also disclosed in the Aug. 15 lawsuit that in the fall of 2012, the SEC had opened an investigation of Shkreli’s activities and on Oct. 1, 2012, had issued a subpoena to the hedge fund asking for documents showing the firms’ assets under management. In response, Retrophin says, Shkreli created a “Schedule of Funds Managed by MSMB” that showed MSMB Capital had $2.6 million in assets under management as of Nov. 4, 2012, the date of Shkreli’s submission to the SEC when, in fact, according to Retrophin, MSMB Capital had no assets under management. The SEC and Justice Department complaints reiterate Retrophin’s allegations that Shrekreli had lied to the regulators.

In an interview with Forbes at the time the lawsuit was filed, Shkreli said that Retrophin’s allegations in the lawsuit were “completely inaccurate”.

“Yes, there was a trade,” he told Forbes, “but it certainly was not the way it was described in the lawsuit.”

Despite these disclosures, Marcum agreed on Dec. 8 to be KaloBios’s independent registered public accounting firm, replacing its previous auditor, EY, who had abruptly resigned when Shkreli took over.

A spokeswoman for EY, formerly known as Ernst & Young, declined to provide further comment on its reasons for resigning the KaloBios audit beyond a statement that accompanied the filing.

KaloBios said when it announced the change in auditor that it had not consulted Marcum during the most recent two years about how to account for any particular transaction or asked in advance what kind of audit opinion it might give on its financial statements. This disclosure is required by SEC rules to reassure investors, and the SEC, that KaloBios was not auditor or opinion “shopping” when it selected Marcum.

Retrophin, for its part, wants credit for getting rid of Shkreli and cleaning up its own act. In its announcement after Shkreli’s arrest, Retrophin said a new chapter began “the day the company replaced Martin Shkreli more than a year ago—and that decision has been vindicated by today’s indictment.”

A spokeswoman for Retrophin pointed to its disclosures over the years about Shkreli as well as its investigations of his activities and the lawsuit. She declined to provide further comment.

On December 22 KaloBios Pharmaceuticals Inc. said in a notice to the SEC that the Nasdaq Stock Market planned to delist its shares, citing the criminal indictment and arrest of Shkreli, the arrest of its former outside counsel Evan Greebel, the civil complaints filed against Shkreli and Greebel by the SEC and the company’s failure to file a quarterly report in time.

Greebel has pleaded not guilty to the charges. His attorney, Jonathan Sack, did not respond immediately to a request for comment.

The December 22 filing also disclosed that Marcum LLP had resigned as auditor on Dec. 21. KaloBios will have to hire another auditor before it can regain its Nasdaq listing.

http://www.marketwatch.com/story/martin-shkreli-hired-same-audit-firm-for-kalobios-that-he-used-at-retrophin-2015-12-28